All About Robo-Advice and How It Works

The term robo-advice is increasingly being used even by banks which offer services they call ‘robo-advice’. A survey conducted by Accenture, a consultancy firm showed that 68% of consumers globally would be happy to use robo-advice to plan for their pension. Another one by Consultancy AT Kearney predicted that robo-advisor will have $2.2 tn to manage in the next five years, that’s a 68% annual growth rate. But what is robo-advice and what do you need to know about it?

What is Robo-Advice?

Robo-advice is a form of financial and investment management. The phrase is used to simply describe an algorithm that works out your financial situation and goals then formulates an investment plan tailored for you. It places your money into different portfolios for you. It uses your answer to a series of questions about your long-term and short term goals, how long before you need your money, income, attitude toward risk and so forth to determine your investments.

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Image Source: Forbes.com

This algorithm is replacing the face to face part of investing which would be awkward at times and leaves the client feeling judged. It is now easier to invest than before. It is also cheaper too. Typically robo-advisors charge 0.5%-1.5% of the value of your investment in annual fees, significally lower than traditional investment.

What do you get for your money?

The low management fees is most of the appeal of robo-advice. You will get to keep a bigger percentage of the returns. The low cost attract many new investors, making it accessible to everyone regardless of age or experience.

The all in fee charged by most robo-advisors include an annual fee for investing your money and financial advice. That means advice from a qualified professional and investment fees can add up to less than 0.5% compared to the average of 2.56% in traditional banking. High fees can put a big dent in your future wealth. An initial investment of $10,000 growing at 5% per year over 10 years paying robo-advice fees – less than 0.5%, may save $2,925 compared to investing the traditional way.

How to Pick a Robo-Advisor
  • Check that the company you plan to use offers financial advice regulated by the Financial Conduct Authority
  • Also check if the robo-advisors offer investments that are suited to you lifestyle and goals. It is important to remember than investments can go up or down so it is important for any financial advice you are offered to be suited to your needs.
  • Check if regular financial advice is part of the package offered
  • It would be best if you could also speak with a human especially if it is to do with your financial future. A good firm will find a way to integrate the technology with branch networks and staff but not every firm is able to do so. Check if the firm you are interested in can provide human interaction as well.
  • The minimum investment required by robo-advisors is a good way to see if its for you. Some may require $10,000 while some may require that you just have $10, pick the one most suited to your circumstances
  • Try and spend the minimum possible on charges, fees and commission

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